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Holcim released its first quarter results for 2014 this week and benefits of a merger seemed clear: both sales and profit were down. Net sales fell by 5.4% to Euro3.35bn and net income fell by 57.5% to Euro65.6m. However, Chief Financial Officer Thomas Aebischer was upbeat on meeting the regulatory requirements of any merger and the prospect of divestment opportunities.

This week we have a guest contributor - Andy Gboka, an analyst at Exotix LLP, a London-based broker specialised in Frontier markets – writing about the impact in Africa from the Lafarge-Holcim merger:

No change in Sub-Saharan Africa cement markets

Looking at (1) the location and size of the assets that both groups operate across the region but also (2) the expansion projects recently announced, we do not anticipate any upheaval in the competitive landscape, at least in the medium term.

Potential reshuffle of African assets

We identify Nigeria and Morocco as the main countries where the two companies are likely to reorganise their operations post-deal.

After the market excitement Lafarge / Holcim's price gains have averaged 9% since the announcement versus +8% the same day (04/04/14). We think it timely to discuss, from a competition angle, the likely impact on sector dynamics in Africa.

Starting with Sub-Saharan Africa where Lafarge and Holcim have been present for decades, the two groups have grown their output capability over time to reach a combined ~20.7Mt/yr. Holcim is a much smaller cement producer through its ~2.6Mt/yr in Ivory Coast, Guinea and Nigeria, whereas the French manufacturer is a regional leader with ~18.1Mt/yr capacity across 10 different countries. North African exposure paints a similar picture, as the Swiss company's installed capacity is ~9.6Mt/yr versus ~21.6Mt/yr for Lafarge (including their respective shareholdings in Lafarge Cement Egypt).

Although we do not believe the proposed merger will significantly alter Africa's competitive environment, business reorganisation is likely in:

(1) Nigeria. LafargeHolcim would control more than ~70% of the United Cement Company of Nigeria Ltd (UNICEM, 2.5Mt/yr in Calabar) which, in our view, is a suitable context for minorities' buyout.

(2) Morocco. More than ~50% of the industry's production capacity is controlled by the two players, a situation that may lead to asset disposals after review by the local competition commission.

Beyond the corporate implications, this announcement also puts into perspective the multiples investors are willing to pay for companies operating in Africa. Indeed, for 2014/2015 financial year the enterprise multiple (enterprise value / earnings before depreciation and amortisation) and price-to-book ratio for the main stocks listed in Nigeria and Kenya average 10.3x and 2.9x respectively, vs. 8.4x and 1.3x for LafargeHolcim (Bloomberg). While demand growth prospects in the teen digits or margins above ~25% (especially in Nigeria) would support a premium for the former names, we think the extent of that premium is questionable.

The best illustration is Dangote Cement, whose market capitalisation stands at ~US$25bn for total capacity estimated at 50 – 55Mt/yr by the 2016 financial year, relatively high when compared to the expected ~US$55bn market capitalisation for LafargeHolcim with (1) 427Mt/yr cement capacity globally and (2) ~60% of its revenue from emerging markets. This underpins our cautious stance on the sector.

Source: Andy Gboka, analyst at Exotix LLP (London-Based broker specialised in Frontier markets).

Andy Gboka will be speaking at the forthcoming Global CemTrader Conference, taking place in London on 2 -3 June 2014.

Ukraine: HeidelbergCement Ukraine has appointed Wolfram Gaertner and Robert Breyer as supervisory board members for three years. In addition, Andrzej Balcerek, Klaus Schwind and Andreas Kern were re-elected as supervisory board members. At the same time, Ernest Jelito was removed from the supervisory board.

Mexico: Cemex has announced that its net sales reached US$3.6bn in the first quarter of 2014, an increase of 8% compared to the same period of 2013. Operating earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 3% year-on-year. The group made a net loss of US$293m for the quarter, a deterioration compared to a loss of US$281m in the first quarter of 2013.

Net sales in Cemex's operations in Mexico decreased by 6% in the first quarter of 2014 to US$737m, compared to US$780m in the first quarter of 2013. Operating EBITDA for the country decreased by 5% to US$250m versus the year-earlier period.

Cemex's operations in the United States reported net sales of US$792m in the first quarter of 2014, up by 8% from the same period in 2013. Operating EBITDA in the country increased by 48% to US$28m.

In Northern Europe, net sales for the first quarter of 2014 increased by 21% to US$912m, compared with US$756m in the first quarter of 2013. Operating EBITDA increased to US$13m in the quarter, versus a loss of US$17m in the same period of 2013.

First-quarter net sales in the group's Mediterranean region were US$412m, 19% higher than the US$347m taken during the first quarter of 2013. Operating EBITDA increased by 11% to US$81m.

Cemex's operations in South, Central America and the Caribbean reported net sales of US$538m during the first quarter of 2014, representing an increase of 8% over the same period of 2013. Operating EBITDA remained flat at US$187m.

Operations in Asia reported a 3% increase in net sales for the first quarter of 2014, to US$146m, versus the first quarter of 2013. Here, operating EBITDA for the quarter was US$26m, up by 8% year-on-year.

Fernando A González, Executive Vice President of Finance and Administration at Cemex, said, "We are pleased with the growth in our operating EBITDA during the quarter, on a like-to-like basis, adjusting for the seasonal maintenance and inventory-drawdown effects, which we expect will revert throughout the rest of the year. We also saw positive dynamics in consolidated volumes and prices for our main products."

China: China intends to stop the production of Ordinary Portland Cement (OPC) 32.5 grade cement. Liu Ming, an official of the National Development and Reform Commission (NDRC), made the comment at a forum according to the Xinhua news agency.

Stopping production of OPC 32.5 grade cement would reduce the country's total cement output by 340Mt/yr, accounting for 11% of the total output. The large amount of OPC 32.5 grade cement had led the overcapacity of the cement industry.

Turkey: Göltaş Goller Bolgesi Cimento has contracted Chinese company Catic Beijing Co to set up a waste heat recovery power plant for a cost of Euro14m. The plant is expected to be installed in two years and should reduce electricity costs by 25% when operational, according to Göltaş. The company's integrated cement plant is located in Turkey's southwestern province of Isparta

Sri Lanka: Work on a Thatta Cement project in Sri Lanka has ended because the Sri Lanka Ports Authority (SLPA) has not yet executed the Land Lease Agreement (LLA). Basic engineering for the cement grinding, storing and bagging plant has been completed but the project has been suspended pending legal issues.

Thatta Cement secretary Taha Hamdani has complained to capital market regulators about the SLPA also signing an agreement with another company whose operational area lies close to its cement project. It appears to obstruct setting up of the cement project within the layout originally planned by the SLPA. The company officials say further progress on the project would recommence 'as soon as LLA is signed with SLPA'.

Philippines: Cement sales rose by 8.6% in the first quarter of 2014. The surge was largely driven by rebuilding following the destruction wrought by typhoon Haiyan in November 2013, according to the Cement Manufacturers Association of the Philippines (CEMAP). Cement producers sold 5.2Mt of cement in the first quarter of 2014 compared to 4.8Mt in the same period in 2013.

"The increase was primarily due to reconstruction efforts following super-typhoon Haiyan," said CEMAP president Ernesto Ordoñez in a phone interview with local media. He added that rebuilding is likely to drive cement sales for 'more than a year' and that private sector confidence was also helping sales.

Following typhoon Haiyan the government of the Philippines raised its budget for infrastructure in 2014 by 37% to US$9bn from US$6.6bn in 2013 to provide for rehabilitation and reconstruction in areas affected by the typhoon. In 2013 sales by the local cement industry grew by 6% to 19.4Mt/yr from 18.4Mt/yr in 2012.

Turkey: Bursa Çimento Fabrikası has started the commercial operation of its 7.5MW waste heat recovery system. The Euro14.3m system was put into operation following a successful test operation, according to Bursa Çimento. The plant can generate some 50MkWh of electricity from waste heat and save some 28,000t/yr of carbon dioxide emissions.

Egypt: Omar A Mohanna, Chairman of Suez Cement, has announced that the company intends to alter its energy mix to use 20% of its energy from waste recycling and 80% from coal during 2014. He added that the Ministry of Environmental affairs has not announced its position on the use of coal, according to AlAhram News. Previous energy supply shortages have reduced production at Suez Cement to 50%.

In related news, the CEO of the Misr Beni Suef Cement Company revealed that his company has received an official letter from the Egyptian government informing the company that the natural gas supply to their facilities will be completely cut in May 2014. The letter added that the government will supply enough Mazut to the company to operate one production line.

Ukraine: Mykolaivcement has reported a loss of US$5.47m in 2013. Its revenue fell by 10% to US$46.6m from US$5.28m in 2012. In 2012 Mykolaivcement reported a loss of US$5.79m according to the Ukranian News agency.

The cement producer based in Mykolaiv, Lviv region also makes paving slabs and facade tiles, concrete, pavestone and other construction materials. In April 2013 Cement Roadstone Holdings held talks with Lafarge on the acquisition of the company. Lafarge Ukraine Holding owns 99.26% of shares in the factory.